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Wednesday, August 25, 2010

A Second Dip for the Recession?

While the stock market crashed on "black Friday" in 1929, the worst effects of the depression were felt years later.

Are we headed for further trouble with the economy? Many news pundits are saying so, but it is hard to tell if they are being honest or just promoting a right-wing agenda in anticipation of the mid-term elections.

Bad news means more votes for the party out of power, so we are seeing news distorted in a way which makes things look worse than they are. Good news is ignored and bad news is amplified. It is not hard to bait people this way.

But if history is any guide, we probably are in for more bad news before we see good. If you look at the history of the Great Depression, or our last recession of 1979, you see a pattern of long-term unemployment, lack of investment, and slow growth, for many years after the initial shock of the crash.

Two years ago, just before the last election, things were very scary. In fact, it is hard to believe we lived through all that without freaking out. Major banks going belly-up. The government bailing out most all of our financial institutions. General Motors and Chrysler going into bankruptcy! Nearly 1/3 to 1/2 of the value of most American's 401(k) savings wiped out in a matter of months. It is hard to believe, in retrospect.

Perhaps now, two years later, we are suffering from post-traumatic stress disorder. We lived through that period by saying "we'll get through this" and to a large extent, we coasted. Job losses and lack of capital was not as immediate as the initial crash. But two years later, we are starting to see some effects.

In my business, I can sort of gauge the health of the economy by the interest in Patent filings and also by how long it takes my clients to pay. When the economy is down, I get paid on 60 or 90 days. When things are robust, the checks come in 15 days from the date of invoice.

Lately, I am seeing less of an interest in Patent filings from many companies, and many of my fellow Patent Attorneys report the same. Patents have been weakened by new procedures at the Patent Office, making them harder to get. Court decisions and new laws have narrowed the scope of enforcement. So Patents are worth less, and people are spending less on them.

Since capital is tight in many sectors, the amount of money to invest in new technology is hard to come by. No one wants to risk a million bucks on a new idea anymore. Tech sector companies which do have cash are buying up other companies, which means less competition and less innovation in the marketplace.

The hot new products these days are based more on monopoly practices than on real innovation. The new iPad does not have many technological innovations - it is merely another variation on the tablet computers of years gone by. But by having a proprietary format (and proprietary library format) the real battle for the marketplace is in selling the content, not in the devices themselves (which are often sold for below cost).

So vaunted products like the iPhone are not sold on innovation alone, but on a tie-in to a captive service provider, as well as the concept of selling propriety format "apps" for the device.

In a way, this is to be expected in the tech sector, as real innovation in hardware languishes. The Personal Computer has not changed dramatically in a decade or more. It merely gets cheaper, has more memory and drive space, and the processors get marginally faster each year. We may, in fact, have reached a plateau in PC design.

The real growth in the last decade has been in the emergence of Internet-related industries, which have taken nearly every aspect of our daily lives and put them online. Despite the hectic initial growth, we are finding that here, too, monopoly practice rules the day. eBay dominates online auctions, not because it is technologically or inherently "better" than other auction sites, but only that it is the most popular, and there is little point in visiting an auction site with poor selection or a small audience.

So, in other words, growth today is focused on making existing products cheaper, and this usually means moving more and more operations off-shore in order to cut costs. For the long-term job growth outlook, this is not a very good trend. Eventually, we will see the costs of offshore labor increase, and some of this work may come back. But such trends are decades in the making.

The other part of the equation is stagnation due to population shrinkage. No, the population of the country isn't shrinking yet, but the rate of growth is slowing, and the next generation is smaller than the present. This means we will have more houses on the market tomorrow than we will have buyers, and that, in turn, means that long-term appreciation for homes will stagnate.

And these trends do not bode well for the unemployment picture, either, which many believe will remain at near double-digit levels for the next few years.

It is not a heartening prospect, to be sure. Economic recovery will occur, of course, but it may be a few year off. In the short term, however, things will remain somewhat bleak, at least compared to the go-go years of a decade ago.